Alex Gurevich
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I bought a house in November of last year, 2021, that was posted for a property tax sale auction. I just bought a condo/townhouse yesterday, also posted for a tax sale auction. The first sale closed a day before the auction, and the 2nd closed 2 biz days before the auction date.
I find that just because someone owes past due property taxes, they don’t necessarily want to, or are mentally ready to sell. The local tax office might have payment plans available for the property owners and have a fare degree of leniency before they get serious and post the house for an auction. Around here I’ve seen the county wait for a year or two after they obtained a court judgment, and before they finally put the property up for an auction.
I should also mention that both properties were un-probated estates. I.e., I bought them from children of the deceased owners. One of them had a large state lien against the estate that I had to negotiate down to make the deal work. In other words, unless there are complications, it’s hard to stand out of the crown of other investors who are chasing after the same folks whose properties are publicly posted for an auction sale.
I was able to project plenty of experience to solve the legal and title problems for the heirs in an efficient and speedy manner (2-3 weeks in Texas from posting of sale to the auction), and that’s what allowed me to get the contracts signed ahead of the competition.
Michael,
You may be overcomplicating it. I try to make my deals as simple, straight-forward and most-importantly – as final as I can from day 1.
I have a couple of reservations with getting options on properties in general. My first challenge with an option has to do with laws in Texas. In Texas I can’t have a deed of trust on a homestead property securing anything except a purchase money lien (or a refinanced of purchase money), mechanics lien or home equity loan (HEL can’t be originated or owned by a private party either). So there is no way to secure the option by a DT in texas unless the property is owned by a landlord, not an occupant owner.
Second, just the mere fact I have to think about enforcing the option is quite unsettling to me. If the homeowner dies, you’ll be dealing with an estate. A probate judge could stop you from enforcing your option for some time. A bankruptcy of the owner will have a similar effect. People can disappear when you want to exercise, etc. etc.
If you’re buying a property from the owner via a Deed and he/she retains a life estate — the deal is done. You have a deeded interest that is superior to any other liens or events that may happen after that deed is recorded. All liens, judgments, IRS liens, etc. that come after your Deed will be wiped upon upon termination of owner’s life estate.
The only 3 things that you have to watch for are: liens that pre-exist your Deed (payments must be made on existing loans), property taxes and insurance of the structure. That’s a very strong legal position to be in. That said, an option might be easier to negotiate than a Deed.
With regard to your ongoing obligations to the owner. Again, structure your deal so you’re not on a hook for too much , too long. In my case I prefer to pay a lump sum upfront, and be done with it. I’ve done it this way so far. If I’m ever in a situation when the owner needs monthly income, I’d only commit to a specific number of years after which the payments would stop. Then I know the most I’m on a hook for. I wouldn’t take on more than I am comfortable with.
By the way, you can limit the duration of the owner’s life estate in your Deed. It’s called “estate for years”, look it up. As I mentioned, your agreement could be for life estate or X years, whichever is shorter. Then (a) you’re not obligating yourself financially indefinitely, and (b) you know when you’ll get the property whether the owner dies or not.
Bottom line, you want to help people if it is within your means. But you got to look after your own interest as an overriding criteria. Or you’ll end up like the attorney whose family was still paying 120 year old french lady after he was dead.
I think you’ve heard it from Jackie and I’ll second it – get a good real estate lawyer to draft the docs for you.
>>> Who is typically responsible for repairs during this life estate arrangement? I could see where she might be, but as discussed she is financially strapped.
Boy, what a loaded question this is. If you listened to Jack Miller’s courses he told a story of a woman in France who sold the future interest in her apartment to a man 43 (!) years yonger than her, and retained a life estate for herself. She was 90 then. 30 years later she was still alive while the man who received “future” estate died. Here is the exceprt from Wikipedia:
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In 1965, aged 90 and with no heirs left, Jeanne Louise Calment signed a life estate contract on her apartment with notary public André-François Raffray, selling the property in exchange for a right of occupancy and a monthly revenue of 2,500 francs (€380) until her death. Raffray died in 1995, by which time Calment had received more than double the apartment’s value from him, and his family had to continue making payments. Calment commented on the situation by saying, “in life, one sometimes makes bad deals”.
——–My point is, your friend’s aunt may live for many years. You don’t know how long. Buying a remainder estate is a gamble in that sense unless you have a time limit on it, i.e., “for life of Mary Smith or 10 years, whichever occurs first”. If she stays there for the next 15 years, you can virtually guarantee somewhere along the way the roof and furnace will HAVE to be replaced, as well as other maintenance items attended to.
Should you enter a contract that makes you responsible for maintaining the house for the unknown number of years? It’s up to you what you think makes sense. Perhaps, you could pay a certain monthly amount extra on your note so the owner sets up a little reserve for maintenance, but maintenance becomes her responsibility. And if she gets to a point where she can’t maintain the house, perhaps, it’s time for her to move on to a place where somebody else takes care of the building.
In the end it’s all negotiable. As long as parties see it to their advantage.
One thing in particular has stuck in my mind from Jack’s classes. If you have a good deal, you can always sell it to another party who sees value in it. I don’t know how old you are, but I’m nearly 60. From where I stand it doesn’t make sense to buy remainder estates in hopes of outliving a homeowner, even if that owner is older than me and might appear to be fragile.
It may make sense as an estate I could leave to my kids. At the same time to an investor who is 20-30 years younger than me the same future interest could look at lot more attractive (like in a case of Madam Calment). Possibly even more valuable if it’s tucked into some tax deferred plan.
So when I buy that remainder interest, I buy it primarily with a view to sell all or part of it within a relatively short period of time to another investor. I could sell it to someone with a lot longer investment timeline than mine for cash or for a near term payment stream (lifestyle bump).
Though in an up market like we have now it makes sense to ride it a bit further to a higher equity position. It’ll be easier to sell then.
>>> I figured this was how you would do it since technically we are the owners of the property once this happens. Am I incorrect about that?
Yes, you are incorrect about this. The lady still owns the house as long as she is alive and in compliance with covenants in the Deed reserving her life estate. That’s what life estate is – ownership for the duration of one’s life. You have a deeded future ownership (remainder estate) but it only starts when her life estate ends.
>>> Does the person that conveyed the property usually still make the mortgage payments? I thought that was a function we would do. I was thinking she would pay us the $700 per month, we would add the $250 short fall and pay it.
There are no “rules” for it. You could do it in any way you both agree. However, in your scenario I personally prefer the owners still make these payments to the lender since they still own the property and it’s their name on the mortgage. They are used to it already. To make it affordable for the owners you’d supplement the owner’s income by making the payments to them for the difference you agree on.
The owner would want to be sure you do make these payments on the Note. So when you secure the Note with a deed of trust or mortgage against your future interest, you HAVE TO make them, or your interest could be foreclosed out. The arrangement cuts both ways. She has her obligations to fulfill (loan payments, insurance, basic maintenance) or she loses her life estate. You have your Note payments to make to support her lifestyle, or you can lose your future interest. Your Note could alternatively be secured by something else of value that she would consider a good security for your obligation to her.
Yes, when you find a property like this there is an inevitable thinking about “less quick cash vs most slow cash”. I’ve done these kind of pre-foreclosure deals dozens of times. I found by trial and error the fastest way to get the “most possible cash in a short time” is wholetailing.
1. You close the purchase by reinstating the loan and taking the title subject to the mortgage (with a title policy to make sure your profit is insured).
2. Clear out all cabinets, take off all curtains & blinds, haul away the trash from inside the house and the yard, rake the yard, trim overgrown shrubs
3. Stick it in the MLS advetising it as a fixer-upper “as is” at a somewhat discounted price but not the wholesale price.In some extreme cases when the property wasdamagedand/or filthy to the point of disgusting, I even did the demo too before listing it in MLS. Ie., removed the baseboards, tubs, vanities, kitchen cabinets, toilets, doors & trim, light & plubming fixures, etc. I.e., prepped the house for a rehab.
MLS is the place where unsophisticated buyers, both investors and occupants, are looking for distress properties. The listing attracts the most qualified people to bid on the property. The MLS therefore establishes a fair market value for the property. You got to give yourself some time to get the highest and best offer. Since you closed, unlike a wholesaler you’re not limited by a short time period.
It works the same for vacant lots. I once bought a lot on the cheap and thought I’d be lucky to get it sold for $80K or so. This was some 6 years ago. There were no prior sales of lots in the area anywhere near that price. I ended up putting it in MLS at $80K and sold it for $125K. There were 15 offers. If I just offered it to a friendly builder, I’d probably get $80K for it. Unless you put it in MLS you won’t know what the actual market value is.
I found that the range of offers you’ll get on houses varies wildly. From wholesalers who’ll try to offer less than what you paid, to rehabbers who want to fix and flip, to landlords who want to do minor fix up and rent it out, to owner-occupants who want the house for themselves. I found that on $200-$300K bread and butter houses I’d make $30-$40K more with wholetailing than I would with wholesaling or just by selling to a known rehabber or investor.
That, of course, presumes a reasonably active market with plenty of buyers actively looking for fixers to buy at discounts. I found that in most cases I got an acceptable offer within 2-4 weeks.
I had one case when I was wholetailing a $560K waterfront fixer. This property that was in a horrible condition, but set on a lot with spectacular views of the lake with direct access to the water. It took 3-4 months to get an offer from a bona-fide buyer who wanted this waterfront property for himself and had the resources and capacity to rebuild it. The difference between the price he paid and the highest “rehabber” offer was over $100K. It was worth it to hold out that long.
I think what Jackie meant was the owner would sell/convey the property to you subject to existing mortgage debt and reserve a life estate for herself. I.e. , she owns and uses the property for as long as she is alive. Her life estate terminates when she dies or when she goes to assisted living. Additional covenants of the Deed would be she continues to make payments of her mortgage when due, pays taxes and keeps the property insured up to a certain value. The life estate would terminate if / when she breaches these covenants.
Additionally you would execute a note payable to her at $250/mo to make up the difference between mortgage payments and the $700/mo she can afford. The note could be secured by your interest in the property, the balance on the note would become zero at the same time when her life estate terminates for any of the reasons above.
With regard to ongoing maintenance – you’d have to discuss it with her and agree on something that makes sense to both parties. Perhaps, you pay her a little extra each month on the note and make her responsible for maintaining the property during her life estate. Then ongoing maintenance sufficient for preservation of the property would also be a covenant binding on her recorded in the Deed for her life estate reservation.
Definitely have an attorney draft the docs. I’d suggest extensive disclosures.
